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Getting Real with Real Estate in India

India’s realty sector is primed for a boom. With the world’s second-fastest growing economy and almost a third of the country’s population of 1.3 billion residing in urban areas, the potential for growth in residential and commercial real estate appears to be on the verge of taking off.

So why aren’t investors rushing to open their wallets?

One reason is that real estate prices in India are artificially high. Realty is one of the country's most mismanaged and unregulated sectors, burdened by bribery, money laundering, fraud and black money (illegal or untaxed funds). Corruption, especially in major cities, continues to plague not just the realty industry, but other sectors throughout the country as well.

To combat these scourges, Prime Minister Narenda Modi instituted a bold and controversial policy last November designed to add more transparency to the nation’s cash-driven economy and attract more foreign investment. Modi demonetized the two largest bills — the 500 and 1,000 rupee notes, representing about 86 percent of the currency in circulation — to compel the country’s citizens to place their money in taxable bank accounts.

The impact on cash-dominated sectors, like realty, has been substantial. Prices dipped in the sector after several developers who were facing a cash crunch were forced to liquidate inventory at discounted prices. Additionally, the government instituted several regulatory reforms that have added optimism.

But global investors and developers are eyeing the progress warily. They’re waiting to see how the impact of reforms and demonetization play out through this year. Already, some experts have suggested that the currency policy has contributed to an economic slowdown. In the second quarter of 2017, India’s GDP fell to 6.1 percent from a blistering first quarter pace of 7 percent.

For interested parties eager to capitalize on the coming boom in India’s realty sector, the key is to stay abreast of developments related to the reforms and be prepared to quickly take advantage of the land rush when it happens.

Falling Interest Rates

Modi’s demonetization move may have been a jolt to the system, but it did as it was intended — it forced cash into the banking economy. The surge has compelled India’s banks to lower lending rates. The State-owned IDBI Bank Ltd., for instance, reported a reduction of 30-60 basis points since January.

Despite the falling rates, however, opportunity for investors is still wanting. The availability of credit to retail buyers at low cost has yet to be seen, with loan and interest rates hovering between 9 and 9.5 percent. In addition, India’s banks suffer from non-performing loans and assets representing close to 4.5 percent of GDP, making them reluctant to extend more credit.

Reforms Take Hold

All signs point to seriousness of purpose when it comes to reforms. In November, the government enacted the Real Estate Regulation Act (RERA) which reduces the obscurity of realty transactions. The Goods and Services Tax (GST) has aided in streamlining taxation, and improved ROI for investors.

The greater transparency has helped accelerate the dispute resolution process for cases involving construction companies. Amendments made to the Benami Transaction Act — which requires that owners’ names be attached to property deeds, have helped establish guidelines for good business practices, as well as stricter punishments.

Fortune 1000 companies have taken notice. Some are scouting out space in India, attracted by the efforts of the new business-friendly government. Foreign developers are on the hunt for strategic partnerships and are actively pursuing global ventures. They are expected to invest a potential USD$3-4 billion into India’s realty sector over the next three years.

Real Estate Investment Trusts (REITs)

The reluctance of banks to extend credit has helped create a market for Real Estate Investment Trusts (REITs) for the first time. According to The Economic Times, India has a massive REIT potential. Case in point: The realty sector currently boasts upwards of 229 million square feet of office space that is REIT-compliant. In context, if roughly half of that space were to be listed in the coming years, it would be valued at USD$18.5 billion.